Reference no: EM133189456

Question - Marisa Brathwaite and Associates is a business operating in Hanson Heights Grenada. The company is considering replacing its current manufacturing equipment with the latest equipment available for the industry. Its current equipment was purchased 5 years ago, for $1,600,000 and recently was upgraded at a cost of $400,000. The current equipment can be used for another eight years after which its salvage value will be zero. Alternatively, the company can dispose of the existing equipment at is current market value of $250,000. The company can purchase modern equipment which is currently being sold for $3,000,000 and would require an additional $200,000 to have it installed. This new equipment will have a useful life of eight years and a salvage value of $500,000. If the new equipment is purchased management expects costs savings as this new equipment would only require one operator with an annual salary of $150,000 compared to the five operators at $80,000 each required for the original equipment. The new equipment is also more environmentally friendly and will reduce production costs by $200,000 per annum. Maintenance costs will be reduced by 75%, the current maintenance costs of the old equipment is $400,000. The new equipment will be depreciated at $337,500 for the next eight years compared to the old equipment being depreciated at $200,000 for the next three years. Evaluate the proposal to modernised the equipment using the NPV method and determine the discounted payback period.